Have 'money addicts' taken over our political system?

Money is now recognized as an addictive substance. In an article published in the New York Times on January 19, 2014, Sam Polk, a former hedge fund trader, described his money addiction and how he overcame it.[1] The rules of Wall Street make it possible for money addicts to feed their habit.

As AlterNet's Les Leopold pointed out in a January 22, 2014, response to Polk's confessional, "[m]ost economists... argue that all profits, no matter their source, are productive profits. The ever-omniscient markets wouldn’t allow Wall Street to make so much money unless an equal amount of value was produced in exchange.... [E]ven Polk knows firsthand that Wall Street’s wealth is based on producing products that have no redeeming value at all, except to siphon off the wealth of others."[2]

Leopold blames the market-deregulation trend that began in the 1970s as the facilitator of Wall Street's unbridled money addiction. He cites Bureau of Labor Statistics numbers showing that yearly compensation in the financial sector since the 1970s has boomed, while yearly compensation in the non-financial sector has remained flat over the same period.

"Before deregulation, no matter how smart you were (and no matter how addicted to money) you couldn’t make more on Wall Street than you could in the rest of the economy.... [T]axes on the rich were high and the income of the average worker was rising steadily (even after inflation). But after deregulation, Wall Street wages went sky-high and are still climbing because our economy’s wealth was moved into the financial sector. Most working people haven’t seen a real rise in income for over 30 years."

Money and political power

The addictive power of money was studied by Jeffrey Pfeffer, a professor at the Stanford Graduate School of Business. Jenna McGregor's January 10, 2014 Washington Post article describes Pfeffer's work with researchers at the University of Toronto and Renmin University of China.[3] Their research indicates that the more money people make, the more they value money.

Pfeffer's proposed solution to money addiction is a graduated tax. McGregor quotes Pfeffer: "What we've typically done with addictive substances like nicotine and gambling is tax them. Maybe this will fix some of the problem."

Wall Street owns Congress and regulators. In an April 24, 2014, article on Slate, Alison Fitzgerald and Daniel Wagner describe the stranglehold lobbyists for large financial firms have placed on Congress and regulators.[4] The authors cite figures compiled by the Center for Responsive Politics that puts total contributions by financial companies to congressional candidates in the current election cycle at $149 million, by far the most of any single industry.

Money is power, after all. The prospect of re-regulation or increased taxation of the rich is almost nil in the current political and economic climate. If money is power, and power corrupts, as Lord Acton and others have famously pointed out, then is money inherently corrupt? Not necessarily.

Lord Acton's well-worn axiom that absolute power corrupts absolutely is brought into question by research conducted by Katherine A. DeCelles, a professor of management at the University of Toronto. DeCelles co-authored a study published in the June 2012 issue of the Journal of Applied Psychology entitled "Does power corrupt or enable? When and why power facilitates self-interested behavior."[5]

As Christopher Shea reports in the October 2012 Smithsonian Magazine, the researchers found that "power doesn’t corrupt; it heightens pre-existing ethical tendencies."[6] The research subjects were assigned a moral-identity score based on the extent to which they considered the effect of their actions on others. Those with a high moral-identity score were more likely to use their power for the common good, and those with a low moral-identity score tended to exercise their power for their own self-interest. Shea closes with this quote from Abraham Lincoln: “Nearly all men can stand adversity, but if you want to test a man’s character, give him power.”

As with other addictive substances, it appears not everyone is susceptible to a money addiction. Unfortunately, those that are susceptible to the addictive properties of money have gained an advantage in our political and economic systems. Throughout our nation's history, politicians have struck a tenuous balance between the need to fight corruption and the desire not to hinder business profitability. At various times over the past 200 years, corrupt business practices have gotten the upper hand, but ultimately the people, through their government, respond to restore the balance... at least temporarily.

A contrived distinction between 'venal' and 'systematic' corruption

In The Concept of Systematic Corruption in American History  (PDF), John Joseph Wallis distinguishes "venal" corruption from "systematic" corruption: the former is motivated by personal gain, while the latter is intended to control the government by "[m]anipulating the economic for political ends."[7] In Wallis's view, venal corruption is relatively harmless from a political perspective, particularly when compared to systematic corruption. Wallis blames politicians for systematic corruption, and exonerates business: "Systematic corruption occurs when politics corrupts economics.... Venal corruption occurs when economics corrupts politics."

Wallis claims that venal corruption will always exist, but he posits that systematic corruption has been eliminated in the U.S.:

"[U]nlimited free entry and competition unrestricted by governments... developed as a solution to systematic corruption: a solution to the political problem of preventing narrow political groups from obtaining uncontested control of governments.... Eliminating systematic corruption required an economic solution to a political problem. Between the 1790s and 1840s, the United States developed a constitutional structure of state governments that mandated free economic entry and competition. It took seventy years, but the round of American state constitutional changes in the 1840s are the heart of what eliminated of [sic] systematic corruption. American governments were so successful at eliminating systematic corruption that we no longer understand what the term corruption meant in the 1800s, nor do we worry about systematic corruption in our political system."            
Say what?

Unfortunately, I do not share Wallis's unbridled optimism about the demise of corruption in our political system. Nor do I believe his distinction between venal and systematic corruption makes any sense in the current political/economic climate. Corruption for personal gain and corruption to amass political power are synonymous: whoever amasses political power via corruption will ultimately use it for personal gain. Corruption is corruption, regardless of whether it is perpetrated by an individual or by individuals on behalf of an institution.

Fear of political corruption trumps government economic regulation

Wallis claims that economists' distrust for government traces back to a practice of European monarchies and ministers who would limit access to markets by imposing rents (fees) and then use the resulting revenue to buy off politicians. The financial policies proposed by John Adams, Alexander Hamilton, and other Federalists in the late 18th and early 19th centuries raised a specter (or scepter) of monarchic rents among Republicans such as Thomas Jefferson and James Madison. As Wallis writes:            

"Tarring Adams and the Federalists with being closet monarchists played well to some voters, but it was the fear of executive influence in the legislature, wielded by Prime Minister Hamilton through the coordinating mechanism of the Bank of the United States and the national debt that posed the greatest threat. It was a threat that resonated with a century of British political writing and the decades of American paranoia over corruption in the Britain. The negative political implications of the Republicans['] existence as an organized political party were minimized by stressing the rightness of their cause.... If the Republicans were truly right, then their cause was not a partisan one but a righteous one, and when the country came to see the wisdom of their position there would no longer be a need for competing parties."

We all know how that end-to-competing-parties thing went.

Corruption was a central theme of the Presidential election of 1824 contested between John Quincy Adams, Henry Clay, William Crawford, and Andrew Jackson. Jackson won a plurality of the popular and electoral votes, but Clay ultimately supported Adams, who was elected and subsequently appointed Clay Secretary of State. Jackson's successful Presidential campaign of 1828 was predicated on his promise (made soon after the result of the 1824 election) to end such corruption: "So you see, the Judas of the West [Clay] has closed the contract and will receive thirty pieces of silver. His end will be the same. Was there ever witnessed such a bare faced corruption in any country before?”[8]

According to Wallis, this rift was the genesis of political factionalism in the U.S., and its inherent corruption:            

"The Democratic party built to elect Jackson did not disappear after 1828; competitive party politics became a permanent part of American politics and raised the specter of corruption, faction, and party. Finally, the opposition party that emerged during Jackson’s first term, what became the Whig party headed by Henry Clay, chose to contest Jackson in the arena of economic policy. The first defining question for Whigs and Democrats was whether the national government should renew the charter of the Second Bank of the United States. The question boiled to down to whether a national bank was an instrument of systematic corruption."            

As stated above, Wallis credits state constitutions enacted in the mid-19th century as providing the solution to systematic corruption in government. Whether or not his claim has any validity, the fact is political and economic corruption were far from eliminated. In the late 19th and early 20th centuries, corporate corruption reached unprecedented levels, giving rise to the Progressive movement. However, Wallis believes the Progressives had it all wrong:            

"When a small number of unprecedentedly large corporations sprang into being during the merger wave, the national and state governments responded to the public perception that corruption was again a problem in American politics. But they responded much differently in the first decades of the twentieth century than they did in the nineteenth century.... In classic commonwealth political theory, increasing government regulation raised as many red flags as did special corporate charters. Regulation created the opportunity for creating rents and rent creation created the possibility for political manipulation of the economy."

Conversely, deregulation in the late 20th century allowed the financial industry to exert unprecedented influence over all aspects of federal and state governments.

Investment-oriented political contributions boost the bottom line 
          
A public, for-profit corporation's duty to maximize shareholder value requires that it attempt to influence public policy in the corporation's favor. The methods of exerting influence over public policy include but contributions to political candidates, political parties, and political causes. (Lobbying is the most important of other methods used by corporations to influence public policy.) The larger the contribution, the greater the corporation's influence.

Whether corporate political influence entails corruption is much more than an academic question, as reported by the New York Times' David D. Kirkpatrick in January 2010 following the Supreme Court's decision in Citizens United v. FEC.[9] According to Kirkpatrick, "[t]he Supreme Court has consistently said that only fighting corruption or the appearance of corruption justifies laws that restrict political spending. Other rationales — like leveling the playing field between the haves and have-nots — are not enough."

In "The Influence of Campaign Contributions on Legislative Policy," Lynda W. Powell of the University of Rochester cites a 2003 study by Michigan State researchers Sanjay Gupta and Charles W. Swenson entitled "Rent Seeking by Agents of the Firm" (paid site) that found "the amount a firm’s PAC and executives contributed to the tax-writing members of Congress was positively related to the anticipated financial gains to the firm."

Using a hybrid model, Powell attempts to predict a legislator's voting behavior based on the amount of time the legislator spends fundraising and the effect on "investment-oriented contributions." These are political contributions by managers made with the specific intention to increase corporate profitability and value, and by extension the manager's own profit-based salary and bonuses.

While party leaders and committee chairs can be expected to offer greater return on investment-oriented contributions than contributions to new legislators, Powell concludes that corporate political contributions increase the likelihood that the legislator will favor the firm in the legislature. Further, her research indicates that "[t]he more time members spend fundraising for themselves and for their caucus and the greater their relative rate of return on their fundraising time, the more they rely on [corporate] lobbyists."

In "Corporate Political Contributions and Stock Returns" (PDF), Michael J. Cooper of the University of Utah, Huseyin Gulen of Purdue University, and Alexei V. Ovtchinnikov of Vanderbilt University report that " the average firm participating in the political donation process contributes to 73 candidates over any five-year period, 53 of whom go on to win their elections."[10]

The research indicates that the more candidates corporations supported overall, the greater the "future abnormal returns," which the researchers define as an unexpected financial increase over a "characteristic matched portfolio over the same period." They conclude that the "contribution effect appears to increase for firms that have longer relationships with candidates, support more home candidates, and support more powerful candidates."[11]

Further, while contributions to both House and Senate candidates proved to have "positive economic effects for the contributing firms," contributions to House members are particularly effective in boosting the bottom line. The study authors suggest that the greater impact of contributions to House members is related to the fact that "revenue and appropriations bills must originate in the House."

Whether corporate political contributions can be construed as corrupt is a matter of statutory interpretation. It is increasingly clear that investment-oriented contributions have a direct positive impact on the contributing firm's financial performance.

Case study: Corporate political corruption, 19th century-style

According to Feross Aboukhadijeh in "Gilded Age Scandal and Corruption," the drive for economic progress in the 19th century superseded the need to prevent corrupt business practices:[12]

"Americans disliked many of the abuses they saw in business, but were reluctant to advocate government interference for fear of doing anything to cool the remarkable engines of progress and production."            

Aboukhadijeh describes how some 19th century U.S. corporations would use a holding company to buy another company, transferring all of the acquired company's assets to the holding company, and then bankrupting the acquired company, leaving the first company's investors with nothing. A related unscrupulous practice at the time was the use of interlocking directorates, such as those created by Union Pacific Railroad and Crédit Mobilier: the latter was incorporated by the former ostensibly to supply the railroad with labor and material, but the railroad directors kept their involvement with Crédit Mobilier a secret.[13]

After Union Pacific went bankrupt, the co-ownership arrangement was revealed in 1872. Investigators determined that Union Pacific had paid Crédit Mobilier "hugely inflated prices" for its labor and material in an attempt to transfer assets from the railroad to the supplier.[14] Union Pacific had received "heavy infusions of government money," according to Aboukhadijeh, so the railroad's scheme defrauded not only its investors, but also U.S. taxpayers.

The scandal broke just before the 1872 national election, when Ulysses S. Grant was seeking his second term. Implicated in a lawsuit against Crédit Mobilier as having received stock in the company were the incumbent Vice President Schuyler Colfax, Vice Presidential nominee Henry Wilson, Speaker of the House James G. Blaine, and Congressman James Garfield, among other politicians. Garfield would himself be elected President eight years later, only to be assassinated after 200 days in office by a crazy former supporter, Charles J. Guiteau, who had expected a post-election political appointment.[15]

The fear of government oversight impeding economic growth cited by Wallis and others was the underlying cause of corporate-political scandals such as Crédit Mobilier. It is also the same reasoning used to justify the more recent deregulation of financial markets and the resulting usurpation of political power by the financial industry. The threat to our democracy posed by the resulting plutocracy is the subject of "Corporate ownership of the U.S. government."


[1] http://www.nytimes.com/2014/01/19/opinion/sunday/for-the-love-of-money.html?_r=0
[2] http://www.salon.com/2014/01/22/the_latest_bogus_nytimes_trend_wealth_addiction_partner/
[3] http://www.washingtonpost.com/blogs/on-leadership/wp/2014/01/10/the-addictive-power-of-money/
[4] http://www.slate.com/articles/news_and_politics/politics/2014/04/house_members_who_work_for_wall_street_center_for_public_integrity_investigation.html
[5] http://psycnet.apa.org/journals/apl/97/3/681/
[6] http://www.smithsonianmag.com/science-nature/why-power-corrupts-37165345/
[7] Wallis, John Joseph, University of Maryland & National Bureau of Economic Research, April, 2005, http://www.gvpt.umd.edu/apworkshop/wallis05.pdf
[8] Remini, Robert V. Andrew Jackson and the Bank War. New York: W.W. Norton, 1967.
[9] Citizens United v. FEC (2010) 558 U.S. 310 [130 S.Ct. 876, 175 L.Ed. 2d 753].
[10] https://www.fdic.gov/bank/analytical/cfr/2009/aug/CFR_SS_2009_Cooper_Gulen_and_Ovtchinnikov_2009.pdf
[11] Ibid.
[12] Aboukhadijeh, Feross. "Gilded Age Scandal and Corruption," November 17, 2012, http://www.apstudynotes.org/us-history/topics/gilded-age-scandal-and-corruption/
[13] http://www.pbs.org/wgbh/americanexperience/features/general-article/tcrr-scandal/
[14] http://www.apstudynotes.org/us-history/topics/gilded-age-scandal-and-corruption/
[15] http://en.wikipedia.org/wiki/James_A._Garfield